March 21, 2013

Here we go again. The Bank of Montreal reduced its five-year, fixed mortgage rate by 0.10 points to 2.99 per cent March 5th which has triggered heated debate about the housing market.

Economics is not a precise science. A room full of economists would rarely achieve consensus on what is happening in the economy or what to do to fix it. So, it is important for us non-experts to try and get a complete picture before jumping to any conclusions.

First of all, what happened in the so-called race to the bottom in the United States with their mortgage crisis was fuelled primarily by fraud and poor regulations. This is not the case in Canada.

Next, when and how should a government regulate or intervene with the current problems in a few large urban centres in Canada? Many economists would argue that the market should decide price (which includes the rates of interest charged consumers.) The 2012 federal government regulations, accordingly, interfered with the market forces and caused a downturn in the real estate market.

Other experts argued that more direct regulatory steps should address the excessive rates of interest on consumer credit and debt. The levels of consumer debt are actually what is troublesome and not the mortgage debt.

Others believe that the problem of affordable housing for middle and lower income families has not, and cannot be addressed by borrowing restrictions. There are other options.

For example, I believe that co-operative housing is an excellent housing strategy for those, many of whom are young or single-parent families, where rent is tied to income through the purchase of a share in the housing complex. This allows people to actually find “affordable” housing. These kinds of projects should be available in middle class and upper scale areas like the Richmond Dike near Garry Point in Steveston BC, which I understand has a 10 year waiting list. This is a great investment for governments and for families.

Perhaps other types of housing programs could be made for young families who cannot afford conventional or high ratio mortgages.

Some experts believe that it is impossible to avoid the cyclical upward and downward spiral for real estate. In other words, the government cannot prevent this. This is a fact of life in the grand marketplace.

What government can do is provide other alternatives to housing for middle and lower income families who will be otherwise stuck with rent – also driven by supply and demand.

I would like to boldly suggest that we stop racing in either direction, up or to the bottom. Instead, we need affordable housing and we need to get our personal debt under control.